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Expiring Tax Provisions

Venezuelan President Nicolas Maduro (R) talks with Eulogio Delpino, Oil Minister and president of PDVSA state-owned oil company outside the Miraflores presidential palace in Caracas. (Photo by JUAN BARRETO/AFP/Getty Images)

Venezuela's oil giant PdVSA was late on a coupon payment for its 2035 bonds and provided no explanation for it. The market quickly saw it as a solvency issue, bond prices fell, Nicolas Maduro, the country's beleaguered president, threatened to sue J.P. Morgan for leaking the news about the missed due date. What is to be expected, really? This is a CCC rated debt within a hair trigger alert of default. Yet, if anyone thinks that PdVSA will fold, they might as well believe that -- long term -- Venezuela becomes Cuba. Long-dated bonds will be around long after Maduro and his party are out of power.

Investors buying the long-dated PdVSA debt are betting on Maduro leaving office by 2018. A recall referendum is dead. He's not going anywhere and will serve out is term. Investors buying PdVSA also believe Maduro will not let the country's only credible source of foreign, dollar denominated capital go belly up. If so, as one hedge fund manager told me, Maduro would be seen hanging from a lamp post in Caracas.

What does that missed payment translate to?

Siobhan Morden, Nomura's resident PdVSA guru, says one could argue logistical constraints such as Venezuela redirecting funds through offshore trusts in China. Venezuela had no problems paying on the PdVSA'21s, 2024s and 2026s. The selective delay on the 2035 was for $146 million in interest payments.

How much of the delay is incompetence or cashflow stress?

Venezuela is surely in “penny pinching” mode. The economy is in a shambles. The country is getting poorer by the minute. An OPEC output cut today should provide it with some lift, as some market analysts like Naeem Aslam of ThinkMarkets in London believe oil can easily stay in the $50s now that supply will ease from the main producers. This is a positive for PdVSA on the margin.

As far as what investors really know about PdVSA's ability to pay, there is actually limited information on that. Data transparency in Venezeula is minimal. We know the central bank has around $11 billion in reserves, more than enough to service PdVSA debt.

"Theoretically Venezuela/PdVSA could remain solvent for years on the efficient prioritization of cashflow of dollar assets and dollar liabilities," says Morden. But this scenario requires several critical assumptions, including China loans and payments in arrears to PdVSA oil suppliers. The company is in dire straits, for sure. The only question for investors is can they keep paying their bills while growing their business? It looks like they can keep paying their bills. And if oil prices rise, maybe PdVSA can somehow be inspired to get its act together.

The 2035 delay requires close monitoring of the next few coupon payments to assess whether the main problem is logistics or cashflow stress.

There is a $300 million gold reserve payment rescheduled for today. There has been flexibility from both sides to honor these debts and to avoid a technical default. A nonpayment of any final judgment in excess of $100 million would represent a default.

If Venezuela makes this $300 million payment, this could mitigate concerns about the 2035 delay. Anothere $470 million payment is scheduled for the first week of January. If these payments are rescheduled, it would only reinforce concerns about payment stress and send bond prices lower.